Credit Cards Sock It To You

By EILEEN STILWELLCourier-Post Staff

Times just got tougher for Dan Heller, a partner in a small auto and truck repair shop.

He knows his cash-strapped customers have been forced to put the brakes on preventive maintenance and are stretching their routine oil changes from 3,000 up to as many as 6,000 miles.

But when Capital One and Advanta credit card companies notified him by mail last week that interest rates on his cards would fluctuate with the prime rate and more than double, his concern went beyond his family. Late payment charges, he said, are extortionate.

"I'm worried about all small businesses in this country. I've been through highs and lows before, but this is by far the scariest," said the mechanic.

While credit card companies continue to welcome new customers with platinum credit scores, all of the majors, including Chase, Bank of America, Discover and American Express, are raising some rates and lowering credit lines to stay afloat.

"What happens to people who've been given access to more credit than they can handle and now can't pay their credit bills is going to be our next crisis after the subprime mortgage meltdown," said Phyllis Salowe-Kaye, director of New Jersey Citizen Action, the state's largest consumer advocacy group.

Heller is angry that Capital One received $3.5 billion in federal bail-out money and now is "gouging" their customers. In January, his interest rate on purchases will rise from 6.7 percent to 15.9 percent and his default rate will jump to 29.4 percent beginning April 17.

Advanta did not receive bail-out money. Still, Heller's rate on that card will rise about the same.

"Will Obama bail us out when the cost of credit paralyzes us all? Those credit card companies are handcuffing us. I'd love to buy a used tow truck, but at these rates the payments would rock my socks off," said Heller.

Given the financial landscape, Jack Worrall, a professor of economics at Rutgers University-Camden, said he is not surprised.

"A hell of a lot of people are not working or working only part time because they've lost their full-time jobs. And, as sure as night follows day, unemployment drives up default rates for the credit card issuer and lowers customer spending in general," said Worrall.

"Even people with the best credit are getting increases or having their credit limits reduced because the card companies are a monopoly and can do what they want. They also want to reduce their exposure," said Worrall.

The consumer loses in other ways, as well, said Worrall.

"Each time an issuer lowers a person's credit line his credit rating can be impacted, regardless of the reason," said Worrall.

Heller says his payments never have been late and he rarely carries a balance. When he does for a large purchase of auto parts, he pays three or four times the minimum. He considers himself a "responsible" credit card holder.

Neither Capital One, the fifth largest credit card issuer in the country, nor Advanta, which specializes in small business credit cards, would disclose how many customers are being hit with higher interest rates or credit limit reductions.

The Internet is rife with complaints from consumers about their interest rates and, in some cases, cancellation of their credit cards

In a mailer sent to some Capital One customers, the company cited "extraordinary changes in the economic environment" as the reason for increasing rates.

Last month, Dennis Alter, Advanta's chairman and CEO, said in an earnings conference call that strong measures are necessary, including layoffs and a reduction in dividends, to survive these "exceptionally difficult times for both users of credit and those who grant it with no short-term end in sight."

Had new credit card rules adopted by federal regulators in December taken immediate effect, large increases would not be legal.

Instead, the regulators gave the industry 18 months to comply. According to the Federal Reserve Bank, the new regulations designed to clamp down on abuses and deceptive practices in a nearly $1 trillion industry gave the companies time "to extensively redesign systems and modify procedures."

Consumer groups were livid about the delay.

"This is a grave misstep in an otherwise stellar consumer-protection rule making," said Linda Sherry, of Consumer Action, a national advocacy group. "Regulators have given banks another year and a half to continue indiscriminate interest rate increases on consumers with historically high credit card balances."

Among the many changes to take effect in July 2010 are limits on interest rate increases.

Also on the radar screen is the creation of a Financial Product Safety Commission that would regulate mortgages, credit cards and other financial products in much the same way as the Federal Drug Administration.

Federal agencies that now handle consumer financial protection — such as the Federal Reserve — do so as an afterthought, said Travis Plunkett, legislative director for the Consumer Federation of America.

"The financial services industry has been shopping around for the federal agency or the state agency that would regulate them at the lowest level," Plunkett said in support of a bill introduced this week by a group of House and Senate Democrats to create a financial products commission.